In a hawkish shift, the Bank of Canada has decided to end its QE asset purchases immediately and has brought forward its guidance on the first rate hike to mid-2022. In the view of economists at ING, there is the real prospect of 100bp of rate hikes next year, and CAD should remain broadly supported.
“We got a decidedly hawkish outcome with a decision to end QE immediately and forward guidance on the timing of a likely rate hike moved from the second half of 2022 to ‘the middle quarters’ of 2022.”
“The risks appear to be increasingly skewed towards the Bank of Canada hiking interest rates by a full percentage point in 2022.”
“Looking at CAD’s outlook for the rest of 2021, we’d likely need to see some deterioration in market sentiment or witness a correction in oil prices for USD/CAD to stage a sustained rebound. That’s because we do not expect the forthcoming data-flow in Canada to be detrimental to the loonie or to cause a significant re-pricing of rate expectations.”
“We are currently targeting 1.23 in USD/CAD as a year-end forecast, but given the faster-than-expected move by the BoC and seasonal USD weakness in December, we see downside risks (i.e. USD/CAD closer to 1.20) to our scenario.”
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